AUTHOR BIO
Mike Ballew is the founder of Eggstack®. He’s a member of the Financial Planning Association, an engineer, and software developer.
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ABOUT US
Mike Ballew – Financial Planning Association member, engineer, author, and founder at Eggstack.
Eggstack is an independent financial technology company located in Jacksonville, Florida. Our mission is to help you overcome uncertainty about retirement planning and inspire confidence in your financial future.
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A recent study by JPMorgan Chase revealed that most retirees make this RMD mistake. Are you one of them?
Required minimum distributions, or RMDs, are government-mandated withdrawals from your retirement accounts beginning at age . All pre-tax retirement accounts including traditional 401(k)s and IRAs are subject to RMDs.
The purpose of RMDs is to increase your income taxes. That doesn’t sound very nice, does it?
Over the course of your working years, the contributions made to your pre-tax retirement accounts were tax-free. That means you didn’t pay any taxes on the money withheld from your paycheck that went into your 401(k). The government wants their money; it’s as simple as that. RMDs exist so the government can squeeze you for tax dollars.
Like the retirees in the study, when you take only required minimum distributions from your account, you are living on significantly less than you can afford. You could go more places and do more things. The only good that can come from not using your savings is leaving a large sum of money for your heirs.
RMDs are very conservative. The calculations are based on the assumption you will live to 120. That is insane. While being frugal can be a good thing, it can be taken to the extreme. No one said you should stop living when you retire.
That same study found that 80% of pre-RMD retirees weren’t taking any distributions from their retirement accounts. That is crazy town!
The purpose of retirement accounts is to fund your retirement. Withdrawing as little as possible or nothing at all is too conservative and not a wise allocation of resources. If you weren’t going to spend the money in retirement, you should have spent it back when you were younger and more able to enjoy it.
A better strategy is to save only as much as you need. That way you can enjoy life to the fullest both before and after retirement.
The goal should be to maintain the same lifestyle in retirement that you enjoyed while you were working. In order to do that, you need to evaluate your income and expenses. It’s just math.
That said, the math can get pretty complicated. Leading up to retirement, your nest egg grows based on investment earnings and contributions. Investment earnings are compounded, meaning investment earnings generate investment earnings.
Once you retire, your investments continue to generate returns, although on a declining capital base due to retirement distributions. Then there’s Social Security and taxes. Fortunately, computers are good at solving math puzzles like this.
Before you run out and create the world’s most complicated spreadsheet, there is a better way. Financial simulation programs make those calculations in the blink of an eye. You can instantly see how much you need to save and when you can retire. To learn more, check out this article entitled Best Retirement Planning Software.
Retirement savings are meant to be spent. Don’t make the same mistake that the majority of retirees make by only taking required minimum distributions. Save only as much as you need and use your savings to make your golden years the best they can be.
Photo credit: Pixabay Eggstack News will never post an article influenced by an outside company or advertiser. Our mission is to help you overcome uncertainty about retirement planning and inspire confidence in your financial future.
Financial Planning Association member, engineer, author, and founder at Eggstack.
